NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) has released a new macro-market report entitled “Q: Should the Federal Reserve System Pay Interest on Bank Reserves? A: Yes!” The report makes the following key points:
- Should the Federal Reserve System pay interest on bank reserves? KBRA believes that the answer to this question is a resounding “yes,” yet surprisingly there are many intelligent observers in politics and the financial markets who disagree. While the discussion of the Fed’s ability to pay interest on reserves among modern economists may seem like a recent development, in fact the debate goes back more than half a century.
- Some observers have railed against the “profits” made by banks due to the Fed’s payment of interest on reserves. Progressives, for example, reflecting a neo-Keynesian world view, believe that the Fed ought to stop paying interest on reserves to force these funds back into the economy. KBRA notes that such views reflect a lack of understanding as to how the Federal Reserve System actually functions and its relationship with the Treasury.
- KBRA believes that the 2008 decision by Congress to authorize the Federal Reserve System to pay interest on reserves was entirely correct, albeit a century late. The payment of interest on required reserves is a positive public policy because banks would otherwise be subject to what is effectively a punitive tax. In terms of the payment of interest on excess reserves, KBRA notes that this “problem” is transitory and is a reflection of the increased size of the Fed’s balance sheet. As and when the Fed allows its balance sheet to decline, excess reserve balances will also diminish.
Please click here to view the report.
About Kroll Bond Rating Agency
KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).